The United States became a world power in the generation after the Civil War (1865-1900). Writers sometimes call this period “the Gilded Age,” from a book by Mark Twain. Historians tend to disdain the Gilded Age, but during that time the world witnessed the U.S. making wise political and economic decisions—and reaping the rewards by the end of the century. What did we do right? Three things.
First, we began to pay off the huge national debt we acquired during the Civil War. In 1860, right before the Civil War, the U.S. had a national debt of $65 million. Five years later, when the war ended, the U.S. national debt was almost $2.7 billion—almost forty times the pre-war debt. According to the Historical Statistics of the United States, the total interest charge on the new national debt was almost $138 million—more than twice the total debt before the war. Many Americans (and Europeans) wondered whether or not the U.S. would be faithful to pay off this new, gigantic debt. Republican and Democratic presidents alike agreed that U.S. economic prosperity depended on carrying a much smaller debt load with limited government. Thus, we slashed almost two-thirds of this debt in the 28 years after the Civil War—a time of cutting federal spending and securing budget surpluses every year to pay down the debt.
Second, the U.S. maintained a sound currency. We refused to pay off debtors by having the government issue vast sums of paper money—as some European countries had done earlier. In fact, we decided to back with gold the $400+ million greenbacks that we had issued during the Civil War. Some Americans wanted to issue more greenbacks—and benefit by paying off debts cheaply through inflation. But Presidents Grant and Hayes insisted that the U.S. buy up gold for the treasury so that we could fulfill our implied promise to the owners of greenbacks to pay them all back with gold. When we officially did this in 1879, we were telling the world that the U.S. was open for business on honorable terms. Many foreigners chose to invest in the U.S., and that capital helped expand railroads, the steel industry, and the oil industry—all areas where the U.S. began outclassing England, Germany, and the leading countries of Europe.
Third, we cut taxes as well as federal spending. Some argued that we needed higher taxes to pay off the debt, but most Americans believed higher taxes might encourage more government spending, and would certainly hamper the flow of capital into American industry. We wanted American entrepreneurs to be fully competitive and they were. On the tax cuts, in 1872 we eliminated the income tax and also the estate and gift tax. We reduced the stamp tax and the so-called “manufacturers and products” tax. During this generation, Andrew Carnegie’s company became larger than any steel producer in Great Britain, and John D. Rockefeller’s Standard Oil became larger than all other oil refiners in the world combined. Herbert Dow began challenging the Germans in the making of bromine and aspirin (a battle he would carry into the 1900s). The U.S. became a world leader by the end of the 1800s.
This formula for economic success—cut the national debt, produce a sound currency, and cut taxes—has been drastically violated during the economic stagnation of the last five years. From 2007-2012, the U.S. has sharply increased its national debt, has undermined its currency in part through quantitative easing, and is raising taxes (or trying to raise taxes) and putting stringent regulations on American businesses. Why not do what worked during the Gilded Age? Increase liberty and decrease the size of government.